Good deal! It always has amazed me that many don 't take the time to read, or make an effort to understand, "the agreement" they enter into when/if they sign up, and I believe it is absolutely important that one understands "the deal".
As for exactly what the "Limited Liability" section means, "legal advice" can only be given by a lawyer (and IANAL!). I feel I understand it very well, and if you want my take on what it says "in plain English", I'll happily respond as best I can, with the understanding that my comments on that section are "purely my own understanding, not to be construed as legal advice, and worth exactly what you paid for them!"
As to the other posters' comments, they should probably respond on their own though I have a couple of thoughts:
To me, that clearly presumes that DreamHost just adds more customers without increasing the number of servers deployed or adjusting their network for growth. The fact they they are still well regarded by many after growing to their present size leads me to believe that will not be the case. As I said before, I've seen "growing pains" come, and go, as DreamHost has grown, and I am confident that , "overselling or not", DreamHost can, and will, add sufficient resources to handle their growth.
While I can't speak for lensman's meaning, those I define "kicked out" as those who have had accounts closed or sites suspended for ToS violations such as copyright infringement, spam, and/or running abusive and prohibited services (persistent processes, IRC daemons, servers, etc.). I'm know of other that have had to move to more robust services because the just grew to be too active (concurrent connections, server load, etc.), but I don't consider those in the "kicked out" category.
In my mind, "Playing nice" means recognizing that other users are sharing your server and taking appropriate steps to prevent your site/processes from monopolizing those shared resources to the detriment of other users.
One good example of "not playing nice" might be attempting to host a heavily trafficked "download" site (linux iso distro site?), heavy video downloading site, free image host, or other operation that needs to consistently serve many many concurrent connections with large downloads or interactivity. Many such sites, by the very nature of their CPU usage and demands on the server, are really only suited for operation on dedicated server (or a rack of them!) . People that expect to successfully run such sites on a "low-cost" shared host just need to realize that "it's not likely to work well," and when/if it starts to impact the other users on the server, the host is going to have to step in and make some change.
The ability to survive/handle a Digg or a /.'ing has a lot to do with how efficiently your site is coded and responding to the huge traffic spikes such activity can produce. A static version of that "Dugg" page, good MySQL optimization, etc. are important. Many DreamHosters have handled both Digg and /. without problem; others have had their sites, and the servers they are on, brought to their knees by such things - it's all about the code to a great degree!